MD's Insight - 12/27 - 01/2

Eyes on 2021 Fintech Regs

Everywhere you look, predictions for 2021 abound: the next software vertical to watch, the new species of fintech to double, hell triple, its revenue, and the staying power of select 2020 consumer banking trends that were catalyzed by the pandemic. And for the most part, the predictions I’ve encountered seem pretty well grounded in sound thinking. As such, I’m bullish on many of the 2021 predictions made by my peers.

However, there’s one dimension to all the fintech, SaaS, and payments predictions that hasn’t yet garnered much attention, and is likely imminent as a direct result of the trajectories of the others: regulatory regime change. There are a few specific regulatory issues on my 2021 radar that I feel are worthy of attention as we transition into the new year, and I’d like to share them with you here. 

The first is regulatory reform of laws decriminalizing cannabis in the US. This ought to be of particular interest to payments processors, acquirers, issuers, card networks, and banks. Interestingly, I’m still reluctant to fully commit to this one because there’s another triggering event forthcoming in the GA Senate election races on January 5th. If the two Democratic candidates win, Democrats will control the Congress, Senate, and Presidency, and this all but ensures a faster path to decriminalizing cannabis, and a major boon to all of the aforementioned payments technology players. But even if the Democratic “clean sweep” scenario doesn’t play out, the continued legalization of cannabis by individual states is going to force the issue. We’re rapidly approaching the “‘event horizon” where the combination of interstate commerce becoming untenable and states’ need for tax revenue will make turning back (or standing still) an impossibility. 

The second regulatory issue I see forthcoming in 2021 will involve cryptocurrencies writ large, and Bitcoin in particular. In fact, the wheels are already in motion on this one. New FINCEN regulations were proposed this past December which would require crypto wallet owners to disclose individual account information when executing transactions, and exchanges like Coinbase to disclose transactions in excess of a certain dollar value. The integrity of one of Bitcoin’s most defining, positive attributes - anonymity - will be compromised. Further, and this falls purely in the speculation/prediction category, with the banner headlines of $BTC sniffing $31K USD as of this writing, I expect the new Congress to be inspired to direct heightened scrutiny Bitcoin’s way. There’s no chance Congress can ignore cryptocurrency - even if only for show, it’s a safe bet that there will be hearings on this.  

Lastly, I expect to see regulatory attention being paid to BNPL (buy-now-pay-later) companies. The “alt credit” financial service has been the beneficiary of explosive growth as a result of the pandemic. High unemployment rates, business closures, increased savings rates, and lack of effective stimulus created a perfect storm for a financial tool for provisioning installment payments for goods and services to consumers - and all at the merchant’s expense. There’s no doubt in my mind it has been a big part of a seemingly healthy holiday season (with respect to sales) for both consumers and retailers.

BUT...I see dark clouds on the horizon for BNPL. Facets of the mechanism are already attracting the scrutiny of the card issuers themselves - with CapitalOne already tightening restrictions. From their perspective, there’s a need to reduce losses by banning installment payments made with credit cards (as opposed to debit). From a regulatory angle though, I predict that BNPL companies will become the poster child of consumer protection groups seeking to constrain this financial tool because (they will argue) it has the potential to be exploitative. Rember, it’s another way to extend credit to consumers. And because it’s so new, there’s not a lot of data on how it might negatively impact consumers’ finances.

Wishing all a happy and healthy New Year!

- Adam T. Hark, Managing Director, Wellesley Hills Financial, LLC